Whatever the level of your tax liability, there are simple ways you can minimise the pain. Here are 10 suggestions for making your next bill slightly more manageable.
- Check your tax code each year. Your tax code is used by your employer or pension provider to work out how much income tax to deduct from your pay. If your code is wrong, you may be paying too much (or too little) tax. Your tax code can be found on your payslip and a breakdown of how it has been calculated will have been sent to you by HMRC.
- Claim the marriage allowance. The marriage allowance lets you transfer 10% of your tax- free personal allowance, or £1,150 in 2017/18, to your spouse, if they earn more than you. To benefit as a couple, the lower earner must have income of £11,000 or less in the tax year.
- Make the most of each personal allowance and basic rate band. The personal allowance is £11,500 and the basic rate tax limit is £33,500 in 2017/18. If you are married, it may be possible to transfer income-generating assets (e.g. rental properties) to a spouse to take advantage of their lower tax brackets.
- Take advantage of the CGT annual exemption. Capital gains under the annual exemption (£11,300 in 2017/18) are tax-free. Where you have already used up your annual exemption, you may wish to consider deferring any further disposals until the following tax year if practically possible. If you are married, owning assets jointly also ensures that each spouse’s annual exemption is used (assets can be transferred tax free between spouses).
- Claim tax-deductible expenses. If you are self-employed, you can claim a tax deduction for expenses which are incurred “wholly and exclusively” for the purposes of your business. This includes office running costs and the salaries of any employees, including your spouse.
- Use the annual investment allowance. If you are self-employed, the annual investment allowance currently provides a 100% tax deduction on the first £200,000 spent on eligible plant and machinery.
- Consider incorporation. The corporation tax rate, of 19% from 1 April 2017, (previously 20%), is significantly lower than income tax rates, which are currently up to 45%. You will of course need to pay income tax when you take money out of the company, in the form of salary and/or dividends. However, if you don’t require the income, you have the opportunity to accumulate profits within the lower corporate tax environment.
- Take advantage of the dividend allowance. The recent changes to the taxation of dividends saw the introduction of a £5,000 tax-free dividend allowance, which reduces to £2,000 in April 2018. Whilst there will be winners and losers from the new dividend regime, this allowance should not be overlooked.
- Maximise pension contributions. If you contribute to a workplace pension scheme, any pension contributions you make will be deducted from your salary before income tax is calculated. If you contribute to a personal pension scheme, your pension provider will claim tax relief at 20% on your behalf and add it to your pension pot. If you are a higher or additional rate taxpayer, you can then claim tax relief on the extra 20% or 25% in your self-assessment tax return.
You currently pay tax if savings in your pension pot go above the annual allowance of £40,000 a year. However, this limit has recently been reduced for those with income (excluding any pension contributions) over £110,000, and there is doubt over the future of pension tax reliefs, so they should not be taken for granted.
- Use your tax-free ISA allowance. From 1 April 2017 you can save up to £20,000 (previously £15,240) a year tax-free in an Individual Savings Account (“ISA”). This can be saved as cash, shares, or a combination of the two.
If you’re interested in finding out more about any of these suggestions, make sure to speak to your accountant.